Tuesday, August 21, 2012

Miller Time Again

Matt Miller writes
In case you were wondering, Ronald Reagan wasn’t a Drawbridge because he entered office when marginal rates, at 70 percent, were truly damaging to the economy.
This is written to prove that his critique of Ryan and Romney isn't based on extremism. Interestingly, he feels no need to present any evidence at all in support of his assertion. Of course all serious people agree that top rates of 70% are way too high. I guess that's why the US economy did so badly in the 1960s. And, of course, the 40s and 50s with top marginal rates at 90 percent were such a catastrophe. What is the basis for your claim ? I confess I am an economist and have published on the effects of taxes on growth in the Journal of Public Economics. I am aware of no evidence that top marginal rates of 70% damage economies. It is not for lack of looking. Many economists have attempted to find such evidence and failed. Don't you think you should cite some evidence or, at least, name a source, before making a claim outside of your field of expertise ? I think you are ignorant and completely wrong. I think what you mean is that proposals for a top rate of 70% (from for example a Nobel Prize winner and a Clark medalist) are so very far from being remotely politically possible that you write ignorant nonsense about economics. The grim thing is that I am quite sure that Miller never even considered checking for evidence that 70% is too high. It is just something that all reasonable people accept. I don't think he even feels he made any concession there. The Villager debate is detached from evidence. If a position has been politically marginalized for long enough, then it is considered nonsense without any regard for data.

Wednesday, April 25, 2012

Brad on Ben and the Borg

Department of Huh ?

Borg assimilates Ben.  Although it is forbidden, he must wear the ring to escape.  Third pop culture reference here.

Ben is not being logical.  You can't argue that higher inflation would be worse, because it leads to higher inflation then next time the Fed takes extraordinarily accomodative actions.

The argument is that a higher inflation target would help during this liquidity trap, but it means that just fed funds rate of zero plus new QE1 and QE2 would cause higher inflation then next time we are in a liquidity trap. And that would be bad because ...

Sure sounds to me as if he's been assimilated by the Borg. The claims that Low inflation and the reputation for being obsessed with low inflation are good is dogma.  There is no need for a rational defence.  Rather, it must be right, because it is so implausible.  Anyone can see how higher inflation causes lower real interest rates, but only an adept who has been to the inner sanctum can understand why Ben must never ever wear the ring.

On Graphs and Spin

Brad says US GDP growth is relatively bad because we should have population growth

On pop growth.  I don't see how it helps GDP growth when the economy is in a liquidity trap.  I can see how it keeps inflation low even with rapid GDP growth, but I don't see the relevance under current circumstances.

Also you are arguably unfair to the USA as you start the recession at the US peak.  If you set the German peak to 100% then Germany would be below the US each compared to own peak.

So why am I typing this ?  Look Brad the US is considered the big country with the most expansionary policy.  US relatively bad means Keynes and Friedman failed (to the unwashed pundit masses).

You see the graph as showing that the US is doing nowhere near as well as it could and should.  Others see vindication of Angela Trichet.

Of course you are a social scientist and call em as you see em blogger, so you don't care.  But in case you did, you would be well advised to blog USA ! USA ! USA ! Better than old Europe in every way !

Tuesday, April 24, 2012

Why does Wall Street Hate Obama

I comment on Drum commenting on DeLong.

I agree with you. I had the first of your two thoughts when I read Brad's post. But I am interested in the second now. I think part of the reason businessmen hate regulation is that the suggestion that they can't be trusted hurts their feelings. But I also think there is something even simpler and older -- they don't like the fact that someone is more powerful than they and can threaten them with fines or prison. No one does, of course, but I think this distaste is particularly strong among those who have fought their way to the top of something. Those with enough money to matter as major campaign doners have long had more money than they can spend; they keep at it, because they want to win. I think this selects people with a male baboon level of sensitivity to dominance and hierarchy and little tolerance for the fact that he ranks below the President.

I think the main thing is your first point. Their feelings are hurt as they are reviled not admired and those who supported Obama expected him to be on their side. But I think there is something to point 2b they are angry that he has shown he has the power to tell them what not to do.

Tuesday, April 17, 2012

On Salmon on Koos


I don't get it at all. Koo and you agree that tax cuts won't stimulate as the money will be saved, but also assume that increased government spending must be financed by debt. Given the analysis, the solution is clearly increased government spending and reduced budget deficits financed by massively increased taxes.

In other words my advice for, say Rome, where I live, is raise my taxes.

Also note that the huge Spanish capital account deficit implies a huge current account surplus. The rest of the world is doing for Spain that which the Spanish government can't do. Spaniards are buying foreign bonds and foreigners are buying Spanish goods. This is part of the solution not part of the problem.

Monday, April 16, 2012

DSGE forecasting again

The DSGE models which do a bit better aren't DSGE models. Nthe Baa-Treasury spread is added as an explanotory variable without any discussion of micro founding it. I claim that the model which does poorly rather than terribly is an ad hoc aggregate model without micro foundations.

Also, the outcome on the graph is not the BEA's current estimate (-8% at an annual rate). This means that the outcome as re-estimated months before the publication date of the post is well outside of the 90% confidence interval except for the last panel which shows an ad hoc model using contemporary data.

Finally why no forecasts using data from the trough ? There is no evidence in the post that the DSGE model had any success forecasting the recovery. The good looking figure adds another variable ad hoc. Oddly it just happens to track GDP the growth rate very well.

Sunday, April 15, 2012

Comment on John Williams

This is a comment on an article excerpted by Mark Thoma here


It's not just housing ? Oh really. Oddly discussion of actual evidence tends to get back to housing. For example, search fo "For example". I recall two. On tight credit the "example" is tight mrtgage standards. The claim that small businesses also have a problem with tight credit is not backed up with evidence. I note that only the normal tiny fraction of small businesspeople say their worst problem is "interest rates/finace" .

Then on QE worked. "For example" QE I purchases of mortgage backed securities. There was no discussion of QE II in the article. There was no distiction between opration twist and low forecast inflation, low forecast groth and his own proposal to keep the short term rate low. I would say that twist sure seems to have worked (although no evidence is presented in the article). But I also think the case for QE II consists entirely of conflating it with the other two interventions. In particular no evidence was presented which challenges my conviction that investors treated 7 year notes and cash as close substitutes.

Saturday, April 14, 2012

On Benen on fact checking Romney

It won't work, but, if I were you, I would contact Politifact and Glenn Kessler at the post. They are not listing over 10 howlers a week. Politifact definitely reports multiple instances of the same falsehood. To say something false once might be ascribed to misfortune, to say it twice after the error was reprted suggests deliberate deceit.

I'm pretty sure you won't get anywhere with them as being non MSNBC MSM they feel that professionalism requires them to give Republicans a break if the alternative is an unbalanced conclusion. But it's worth a try.

Also Bush hell what about Nixon. His campaigns are not on the web, but I have no doubt that by today's standards they were serious, honest and focused on policy substance. Someone should compare the public honesty of Romney and Nixon. I sure won't. How about Rick Perlstein ?

Friday, April 13, 2012

On N Smith on Lucas

Smith politely criticized Lucas.  I am very rude in comments.

Let no one mistake this comment as other than an attack on Lucas as an economist.  In "Econometric Policy Evaluation: A Critique" Lucas made no claim of originality.  He wasn't just being modest.  The paper starts with a literature review in which Lucas quoted many papers which made the point.  Someone who was there (Larry Summers) noted that when the paper was presented, the general view was that everyone knew that.

Lucas has made an extremely influential contribution to the study of the history of thought -- he has somehow convinced people that before Lucas macro economics was dominated by idiots (such as Sameulson, Solow and Marshack -- I mean really is it plausible ?).

You kids jump from the Lucas critique to DSGE.  Back in the day, there was a period of fascination with the Lucas supply function.  It is now agreed that this was a totally silly idea, not just wrong but silly.

The Lucas growth model is due to Uzawa.

Lucas did some interesting work on General equilibrium with multiple agents based on Lawrence Weiss's demonstration that results with the Lucas supply function depend on the assumption of symmetric information.  No huge deal but a contribution.

The DSGE model was presented by Arrow and Debreu in the early 50s.  The original contributions of Keydland and Prescott were two.  The first was to make critical totally implausible assumptions such that there is a representative consumer -- this makes a huge difference (as was well known as a topic in first year graduate micro).  It is totally implausible.  The implications are totally false.  It is not an advance.  The second is to claim that a very simple DSGE model with parameters supported by long term trends or micro data gives implications similar to the data.  This is, as have notetd in this blog, a totally incorrect claim.  This was not an advance either.

You mention in passing that DSGE models might give useful policy guidance.  You know and hint that this is just because "might" makes right.  So *might* astrology.

In contrast, the theory of phlogiston fit facts and made it possible to predict thre results of experiments.  I see no basis for a comparison of the scientific status of research on phlogiston and DSGE macro.  Nor was it a dead end -- Lavoisier's experiments sure seem to be attempts to measure the amount of Phlogiston in mercury.  The model was strongly rejected by the data as the measured amount was negative.  Science advanced as it does when models are tested and rejected -- provided they aren't assumed to be useful approximations even if predictions based on the models aren't confirmed.

Thursday, April 12, 2012

On Krugman vs DeLong on the alleged shortsge of safe assets


Brad really. First as you note allll the time the dividend yield should be r-g where g is the expected growth rate of dividends. Krugmans theory is that safe r is low because expected growth is low. That naturally translates to low g. Second, the r in the equation you love above all other equations, is a risk adjusted required rate of return, not the safe r. You position is that the equity premium is unusually high, but here it is important to decide if we want to measure the risk premium as r/rsafe or r-rsafe. As I recall (in one of my most terrifying memories) you could prove it should be r -rsafe in your head while writing 60 words a minute. That's what theory suggests for constant risk.

R-rsafe ( as we both like to stress) is normally huge. Something like 0.05 with rsafe around 2 and g around 2.5 to 3. rsafe is now about 0 so a perfectly ordinary equity premium correspons to growth of 0.5 to 1. Very low, but you have noticed that Krugman is very pessimistic. Expected g of 2.5 should imply a dividend yield of about 0.025 . I just looked it up and found an S&P 2011 yield alleged to be 0.019. But the newish normal for the 21st century seems to be less than I had guessed -- 0.04 to 0.045 but rather 0.3 to 0.35 so my new guess is it should have been 0.01 or 0.015 not 0.025 and I have a big big anomaly of 0.04 to 0.09 to explain. This is a series which has varied from 0.03 to 0.08.

I really see almost no puzzle for Krugman at all.

Also, as always, I suggest looking at corporate bond rates. Nominal corporate bond rates are low. Differentials with Treasuries are higher than in say 2006 but lower than in 2003 (except for total junk). The differentials are tiny miniscule and microscopic compared to late 2008 and early 2009. The current malaise looks very different from the omigod the world is ending months. Your analysis is quite similar.

I am getting bored agreeing with Krugman all the time. I do note that I have been arguing against the shortage of safe assets hypothesis for over a year right here in comments on this blog ( one of which you kindly pulled back to the blog).

Wednesday, April 11, 2012

This is ironic. Benen uncritically linked to the Kilgore post, so I let him haveit in comments

The sensible refutation of Ryan's claim that welfare reform worked in the late 90 s is that everything and the opposite of everything worked in the late 90s. Welfare is still reformed and reformed welfare is not working (click the links in Kilgore's post).

I hate to agree with Ryan about anything, but Kilgore's version of history is absolutely innaccurate. Kilgore claimed that the1993 expansion of the EITC was an "important" part of the 1996 welfare reform. I note that 1993<1996. Kilgore's post on welfare reform is based on an "important" claim of fact which is also totally incorrect.

Since you linked to the post, you should update this post to note the gross error of fact in post to which you linked.

By theway, when I pointed out Kilgores error to him, the person who was deputy assistant secretary of the treasury when the EITC was expanded replied "ouch" and note that the expansion which was not part of welfare reform, was included to ameliorate the distributional impact of the BTU tax (which was replaced by a 4.7 cent a gallon gas tax in the final 1993 "recovery act" bill which increased the EITC and which was not welfare reform).

Kilgore disapproves of progressives who are playing into Ryan's hands by reporting facts damaging to the case for welfare reform. I actually agree that egalitarianism is harmed by noting the facts which make it hard for most Americans (who love welfare reform) to agree with reality based wonks. I just think that journalists should place accuracy above serving the Democratic party. Anyway, Kilgore
has a right to his own opinion but not to his own facts. His claim that Ryan's proposal is not at all like welfare reform rests on a false claim about recent history.

Monday, April 9, 2012

On Simon Wren Lewis

I note that you provide neither evidence nor reasoning in support of the claim that Microfounded model building is a very important and useful thing to do.". Notably the core-periphery hybrid model is vulnerable to the Lucas crtique. What does the core model add which is useful ? Having a model which is not confronted with the data written down adds what exactly ? Does the core-periphery model fit the data better than a model which is not based on adding inconsistent equations to a logically consistent core ?

You note someone's (King's I assume) determination to include a logically consistent core ( then add inconsistent equations before making predictions or guiding policy. As presented, this seems to be a matter of intellectual fashion. Evidence doesn't appear in that stage of your story (as it does in the stage of adding ad hoc corrections to thecore model).

I don't know where to put this, but Mankiw's use of the word " scientists" has no connection with practice in the natural sciences in which, historically, theories bow to facts. Can he explain why he did't write "mathematicians" ?

Finally, what basis is there for the claim that the "better journals" are better than other journals ? They are presented as journals publishing social science, but empirical success is not required. You note correctly that they have huge status in the field, but do not address the question of whether this has anything to do with science, reality, understanding, insight or intellectual progress.

Oh I am getting rude as usual. So, before hitting publish, I want to thank you on behalf of at least UK residents for not sticking with an elegant model which does not fit the data. As I understand this post you et al rendered a false but fashionable model harmless. This made the UK a better place and I applaud your intellectual courage.

More Kilgore

I commented that I agreed with every word in the post above. Not this one. Why do you think it doesn't make much sense for tax fairness etc ? It makes a whole lot of sense to me.

I sense a centrist reflex -- like Obama you feel the need to agree in part with the view you go on to reject. You also love to set up straw men. I think that the trick of ascribing "overriding" to some in your party fails twice. First, since you couldn't identify any such person (until I volunteered in the first paragraph of this commen) the rhetorical trick is obvious. Second, "overriding" isn't an extreme enough word to serve your rhetorical purpose. This is a key issue on which a solid majority absolutely rejects the Republican's overriding priority.

Can you come up with a hint of a shred of an argument for your view that it should't become an overriding issue for Democrats ?

Kilgore centrist

We don't think centrism is the yellow line in the middle of the road, we think it is the dead armadillo. SadOldVet is rude and the past is past, but "maximum" and "unambiguously" are cheap rhetorical tricks which don't work here. Don't stab a straw man in the back.

Note that the word "gullible" was used as a necessary qualifier. The implication is that not all centrists ae gullible. Krugman clearly thinks Obama has learned his lesson ( and what could ever be more useful to Obama than Krugman denouncing his alleged centrism?).

I think the 1 dimensional representation of ideology is astonishgly useful, but can be overdone. In particular, the mederate center of US public opinion does not have a view on taxes on the rich between Obama and Romney but much closer to Obama. They clearly are more enthusiastic about class warfare than Obama admits in public to being. This is demonstrated by dozens of polls going back decades.

The winning strategy is based on defining centrism as standing up for the interests of the US middle class (I sincerely am more concerned about the problems of the third world poor so I should be shunned).

The odd thing about your debatewith Krugman is that you both agree with Obama's current rhetorical strategy. I shudder to imagine what you would write about each other if you actually disagreed about anything.

I hate the captcha, but this one is perfect. It is "ISAbout popolo" . Exactly, it is about the people and populism.

Wednesday, March 28, 2012

I told you so

Kevin Drum notes that Mitt Romney really is extraordinarily unpopular compared to candidate major party candidates in past years.

I tell him that I told him so again and again.

This  isn't news.   Romney has had extraordinarily high unfavorables for a while now.  
Once you said this wasn't as true as the media want us to believe (language policing -- "media" is plural "as the media wants you to believe" should be "as the media want you to believe" or "as the medium wants you to believe")http://motherjones.com/kevin-d... I said you were wrong in comments.You wrote that  the unpopularity of Republican 2012 hopefuls was "much more the rule than the exception"http://motherjones.com/kevin-d... I typed in comments that you were wrong.Later you asked if Romney's high unfavorable rating was  normal.  I told you it wasn't http://rjwaldmann.blogspot.it/... 
The extraordinary astounding unique data can't be ignored anymore.  
I love to type "I told you so" but I told you so, again and again.

Drum has noted this before too, but only after I had told him so as I comment in a partially polite second comment.
Of course you have noted Romney's extraordinary unpopularity repeatedly too.  But I was convinced when you were still skeptical.

Tuesday, March 27, 2012

Shedding Luce

Brad finds it impossible to disagree with Ed Luce.

I find it possible to disagree with Luce.  He writes "AIDS and other diseases" and "fashionable diseases."  Kim's major accomplishment came in fighting TB not AIDS.  I guess TB is a bit fashionable (the Gates's are interested).  Fighting TB is also very hard as half therapy is much worse than none, because it selects drug resistant TB.  Kim is alleged to have managed to arrange directly observed therapy (making sure people take all the pills) in the third world.

Of course Okonjo-Iweala also has huge extraordinary accomplishments.  Such as ... ?  Luce doesn't mention any.  He notes that she is now powerful and has already held a top position at the World Bank.  Favoring insiders sure doesn't sound "meritocratic" to me.  Others have noted that Okonjo-Iweala is very smart.  Luce doesn't seem to consider that relevant.

It seems to me that Luce decided that Kim is the wrong choice strictly because of his nationality.

I stress that I don't necessarily disagree with Luce's conclusion, nor do I think his reasoning is unsound.  I don't see any reasoning at all.

Friday, March 23, 2012

Mitch a Sketch

Ed Kilgore advises Democrats to not throw their Etch a Sketches away.

I absolutely agree.  In fact, the themes of Romney the ruthless vulture capitalist and Romney the flip-flopper complement each other (even more than Kerrry most liberal flip flopper did).  In each case he can be portrayed as being unscrupulous willing to do anything to get money then or power in 2013.  Each mean he is someone from whom one wouldn't want to buy a used car.

The polling is unclear.  The reason is that Obama has been under attack for years.  Most people haven't begun to examine Romney.  I'm sure they can be convinced by video of him saying one thing and its opposite with the exact same tone and expression (he only has one).  Political junkies consider Romney a totally outstanding flip flopper. We are sometimes leading indicators.  Also, on topics other than his own core beliefs (or the absence of same) Romney lies extraordinarily often even for a politician.

The assertion that Romney is completely unprincipled and untrustworthy has the additional advantage of being true.

Brad at Brookings

The guy was presenting a paper and he had energy to consider other presentations.  How many brains do you think are in that skull.  I guess at least three.

3 Separate Comments

3) on Mamelukes. Huh ?!?!? What about Egypt ?  Yes it is mostly desert, but the people live in the Nile valley -- ground zero for extracting taxes from agriculture.  This is where excess grain beyond that needed to feed the farmers was produced.  This was where farmers couldn't run away and farm somewhat less valuable land under another lord (or no lord).  Or maybe ground zero was Mesopotamia.  The Ibn Kaldun hypothesis makes less than no sense.  It is a common story for the Arabian Peninsula on the one hand and Egypt and Mesopotamia on the other.  But clearly they are the most nearly opposite ecologies in the old world.  Egypt has been under central control or a province of an empire longer than any other place.  Saudi Arabia competes with Afghanistan as the area where empire feared to tread (or didn't bother).  The idea of a border (along with the first geometry) came from Egypt.  Saudi Arabian borders were not defined on maps drawn in my lifetime.  The places to look to test Erich Chaney vs Ibn Kaldun are Egypt and Iraq not Iran. 50 years hah.  The experiment is well under way.

1) Stock Watson and Blinder together say a drop in aggregate demand has about the same effects no matter what the cause.  Keynes would not be surprised by this.  It is a problem for newKeynes (have I mentioned that I think that  newKeynes seems to have more to learn from Keynes than vice versa ?).  To the extent that the dynamics are similar, there is evidence that money isn't so very special after all.  This isn't just trouble for Friedman but for all of his followers, that is all mainstream macro-economists.

2. Gauti et all I like your insistence on fiscal not monetary policy.  Many of my critical comments on this blog were comments on posts in which you discussed useful things the Fed could legally do.  But I didn't disagree 100% then and so I don't agree 100% now.  The Fed can irreversibly expand the money supply if it buys a huge amount of illiquid assets.  This is not good strategy for an investor as one loses huge amounts of money that way.  Ah yes loosing money is irreversibly supplying money.  If the Fed manages to have more liabilities than marked to market assets, then it can't retire the liabilities.  Now this means using open market operations to give money to financiers.  I'd much prefer giving it to ordinary people by cutting T.  I also prefer increased G to reduced T.  But the Fed can commit by trading very badly.

To be serious.  If the Fed buys risky assets there are two benefits. One is the one you have been stressing since 2008, that the supply of risky assets to the private sector is too high and this is the root of the problem.  But the other is that if things go bad, the monetary expansion can't be reversed (can't retire liabilities if your assets aren't worth that much).  So the Fed commits to an irreversible monetary expansion if things go badly.  The fact that it transfers its mark to made up balance sheet profits to the Treasury but the Treasury doesn't give the money back, makes it easy for the Fed to gamble -- win for a while and then get stuck so it can't reduce the money supply when it finally looses.

The problem is that if the economy tanks, then the Fed can't avoid creating high inflation expectations (because it will not be able to retire the huge pile of money).  Is this a bug or a feature ?

This approach is within the Fed's current legal authority.  What's the problem ?

Thursday, March 22, 2012

If you stuck Jon Chait end to end, he would reach a consensus

Jon Chait writes

 Ryan explained that there’s a growing bipartisan consensus that we should close tax deductions and loopholes and lower rates. “What we have here on tax reform is a new emerging consensus,” says Ryan. “The president and his party leaders are outside this consensus even though his own treasury secretary says the better way to go is to broaden the base and lower rates.”
Now, there’s not really a growing consensus that tax reform is good. The consensus has existed among economists forever.

and I throw a cow.

Consensus among economists ?  You must be joking.  I am an economist and I absolutely oppose lowering rates whether or not loopholes are eliminated.  As to loopholes, well it depends.  Should we eliminate the mortgage interest deduction ? Sure (but not yet -- and not quickly -- low housing investment is a problem now).  The deduction for charitable contributions not so much.  Tax employer provided health insurance when the Republicans stop trying to kill Obamacare (that is on the first of never).  Eliminate the R&D tax credit ? Why are you nuts ? Eliminate the investment tax credit ? Why tax reinvested profits at all ?

No one like tax expenditures in the abstract (as almost everyone dislikes high government spending in the abstract).  It is impossible to get a consensus once one discusses which deductions to eliminate.

You have long supported broadening the base and lowering rates.  The economists who basically agree with Paul Ryan have long supported tax reform.  Most non Randian economists do to. But many of us don't.

If you want to claim there is a consensus, show me a poll. Also one on just what should  capital gains tax rates, tax treatment of capital income and top income tax rates.  On the second set of questions, I am willing to bet a small amount of money at even odds that most members of the American Economic Association disagree with Ryan about the direction in which policy should change.

Tuesday, March 20, 2012

Derek Thomson is a bit confused. The graph shows the growth of total real per capta government spending, that is federal plus state plus local. This is explained in the comment thread of Thoma's post.

I think the extreme pattern of state and local might have something to do with property tax revenues, has at least something to do with California being at the limit due to prop 13 and Schwarzenegger, and has a good bit to do with the Republican pickups in State legislatures and governors' mansions in 2010.

In any case it is not reasonable to blame Obama who did most of what he could for state and local governments in the ARRA. Blame Ben Nelson for trimming the fat, frying the bacon and milking the sacred cows (and loving it) instead.


Monday, March 19, 2012

Over Savings ?

Felix Salmon argues that the growth of US potential output has slowed. Time Duy notes that it is a demand side argument. I note that this isn't a contradiction in terms.

Robert Waldmann said...
I feel like defending Salmon. The idea that "potential" means "supply side" is not tautological. It is a hypothesis. There used to be a lot of economists who were convinced that demand couldn't grow without bound, so growth was permanently limited by demand (Keynes was not one of them). They sure have a lot of egg on their late faces. But they may have been off by only about a century.

The Salmon hypothesis is that people will never find a way to spend the huge incomes that the US top 1% make. So the only way demand can keep growing is for them to loan money to the bottom 99%. But this can't go on forever as default becomes too attractive (or unavoidable). Clearly we can consume more, but not infinitely more and a lot more than now only if income is redistributed.

The fact that this has not been true in the past, doesn't mean it isn't true now. The case against is accidental theory -- extrapolating the trend of consumption (philosophically like extrapolating the trend of house prices or .com valuations). Yes we can write down a utility function so consumption grows at the same rate forever (I did last Friday). We can write down utility functions with any implication we want. But that doesn't mean that the real world works that way.

Personally, I have unbounded faith in the unbounded gluttony of the US consumer, but I have no proof.

Thursday, March 15, 2012

Inflation Floodgates all Wet

Simon Wren-Lewis notes that Central Bankers feel that a little inflation is dangerous as it can spiral out of control. The analogy is opening flood gates a crack. He also notes that this view (which actually seems a bit shared by ordinary people in a survey) doesn't fit the facts.
I note that the fears of inflation hawks correspond to my favorite model of expectations so I have inflation hawk egg on my face.

Well score one for the credibility of independent central banks. Yes inflation expectations rose above the target, but not enough to set off Stagflation.

Also score one for pretty much rational expectations (no one takes it literally).

In contrast an own goal for my favorite behavioral model of expectations. I just realized that it corresponds exactly to the floodgates hypothesis. Psychologists including Anreasson and Krause have found that people presented with a random walk make forecasts as if the data were generatged by a broken trend. So generally they predict mean reversion, but a few increases in a row and they decide the variable is trending up, so they extrapolate.

This behavior corresponds exactly to expectations which are currently anchored, but also to floodgates which can open. I think it is reasonably clear that actual central bank policy has something to do with believing in this behavioral model (as I generally do) along with ideas that inflation is sinful and so on.

Anyway, my favorite model of expectations failed this time.

Wednesday, March 14, 2012

On Brad on Fiscal Policy in a Depressed Economy

This is
Very nice. I do object to one word " extraordinary " in " absent such an extraordinary need to boost government". My now familiar argument is that, given the equation, if it is not good policy to raise government spending, then it is good policy to cut government spending. I now suggest a parameter for the relative social value of goverment and private spending call it nu so welfare = Y + (nu-1)G. If nu is 1+ zeta, then G is right when mu =0. How low does it have to be for optimal delta G in a depressed economy to be negative ? Clearly in the first not cost benefit case, 0 is high enough. For mu = 1, the only good terms left are mulitples of eta -- the only good effect is due to hysteresis. I think equation 12 becomes arounf 6.5% > r ( doing all arithmetic in my head so prob 0 I got it all right).

Also how about pay back in 30 years with constant increase in T. The advantage is, for a small increase in G, you have all relevant r. No need to forecast as Treasury can sell 30 year TIPS. Of course for a non tiny increase in G you still need to guess what r will be once policy announced, but will no all you need to know before it's too late (policy sell at some minumum price all the bonds you can up to a ceiling, then spend the proceeds). Worth the arithmetic bother ?

Monday, March 12, 2012

Very Rude Comments

Simon Wren-Lewis gets me going again

He wrote

Rational expectations do not prevent us understanding sustained periods of deficient demand when an inflation targeting central bank hits a lower bound. Indeed they help, because with rational expectations inflation targeting prevents inflation expectations delivering the real interest rate we need, as I have argued here.


The traditional Phillips curve has always seemed to me to be an advertisement for the dangers of not doing microfoundations. It seems plausible enough, which is why it was used routinely before the rational expectations revolution. But it contains the serious flaw noted above, which almost destroyed Keynesian economics.

I wrote two very rude comments (in anti chronological order)

You write (suspected typo elided) "inflation targeting ... delivering the real interest rate we need." I note that the ECB has consistently targetted inflation (at least you are willing to give inflation targetting credit for events in 2005 and 2006. You must conclude that the Eurozone has the real interest rate we need.

But the Eurozone suffered a severe recession, currently has extremely high unemployment and appears to be headed for a second dip.

I think you meant to qualify the claim with "with the right inflation target, assuming (for some reason) that the target is credible ..."


I too have semi defended the rational expectations assumption recently. However, the basic advantage I see is that the assumption of rational expectations makes it more difficult (not impossible) for people to tell stories about how their preferred policies are good, because (it is assumed rather than argued) they will influence expectations in a desirable way.

Briefly, I think the point is to exorcise the confidence fairy. Less briefly, my reasoning was that, if one is not required to assume rational expectations, one can argue that cutting spending will cause increased growth by increasing business confidence. A model in which businessmen with rational expectations increase investment and production because of a spending cut is not easy to write. My guess is that it would be a model with sunspot equilibria, so anything can change investment. If so the case for expansionary austerity would be identical to the case that what we need is to burn incense to the flying spaghetti monster (which claim is consistent with the rational expectations assumption on models where sunspots can matter).

The key question, I think, is not rational vs irrational. It isn't even rational vs adaptive. It is whether we should treat expectations as a policy variable imagining that policy makers can control them as they control, say, the federal funds rate.

Then I thought "same for the people who think that expected inflation is just like the federal funds rate" and here we are. I might add, I also thought "this time I won't be very rude in comment" really honestly. But, as I see it, you leave me no choice.

Look why not just talk about a monetary authority which targets real yearly GDP. To a million pounds per capital You are simply assuming that a central bank can get the inflation expectations it wants. That rational people will believe its dynamically inconsistent promises.

Oddly the last time I remember defending rational expectations was when I tried to explain (to Matthew Yglesias) why Paul Krugman was skeptical about the effectiveness of monetary policy right now.

I note again that you have not identified one advance new Keynesians have made beyond Keynes. The alleged examples include speculation about UK consumption some of which, you note, is not incorporated into new Keynesian models yet and none of which has yielded an improved prediction and, of course, the old Phillips curve. The only connection between the old Phillips curve and Keynes is that he warned against believing in it as clearly as anyone could writing before Phillips.

You contest Krugman's claim that those who seek microfoundations have had no successes since the critique of the old Phillips curve yet you go back to that again and again. I see no trace of a justification for your disagreement with Krugman in this post or in any other post of yours which I have read.

Adam Marx

I comment on Kevin Drum Commenting on Karl Smith who wrote

You are very very kind to Smith. If the question is how important are credit conditions, then considering government employment is not appropriate. As you note, as he notes, government employment has relatively little to do with credit conditions. Also the wtwo different scales are misleading. He should have set both series to 0 at the business cycle peak and graphed one job as one job.

You are right again that the evidence strongly suggests that the problem is housing specific and not tight credit in general. Investment in productive capital recovered normally. Corporate bond yields are normal. A tiny fraction of small businessmen consider "interest rates/credit" their biggest problem. Automobile sales are booming.

So what's with housing ? Well it isn't excess housing stock from the bubble (ask Brad DeLong). It sure isn't mortgage interest rates which are tiny. It might be lending standards. It might also be that people have decided that houses are terrible investments for the same irrational trend chasing reason they decided they were wonderful investments in the 00's.

My comments at Smith's blog are extremely slightly less rude.

If you want to look at credit sensitive sectors you really should not add government workers to the goods producing workers. As you note, government employment is extremely insensitive to credit conditions, because state a local government access to credit is legally restricted.

Employment in goods production is recovering. The decline was (of course) much more severe than in the last two recessions, but the recovery has started much sooner after the trough.


Earlier inflation fighting recessions have a very different pattern exactly because those downturns depended on credit conditions which were very tight during the recessions deliberately created by the Fed. and then suddenly looser.

You note that construction is very different from manufacturing. So I looked at manufacturing employment. This time it is very different from the last recession, since it declined less and is recovering.


How about durable goods (which would depend on credit conditions more than non durable goods). Compared to last recession same absolute decline (greater proportional decline). This time recovery. Last time continued decline


It's construction this time.

For this graph I am going to start in 1970, because I notice something. The delay from the peak of construction employment to rapid growth of construction employment has been similar in the four peaks before the latest and should be coming to an end for the latest case around now (and employment has begun to increase).


I didn't know this. I know the economy boomed back after the second dip of the double dip Volcker recession, but I didn't think that this was after a long period of low construction employment. Also I remember the 1974-5 recession lasting a long time, but hey I was only 1 when it ended and not looking at disaggregated data back then. I knew about Bush mush recoveries, but I was very inclined to consider them extraordinary. It all fits an industry which takes a while to get going either because of excess stock because of overbuilding or because uh Rome wasn't built in a day (and Romulus spent a century just getting planning permission and hiring an architect)..

verbal assault is not necessarily misogyny

Kathleen Geier wrote "The New Misogyny"

I lose it.

This is a long and detailed post and I am going to type a long boring comment. I stress my complete ignorance. I was born and bred in the USA, but I've lived in Italy for the past 23 years.

I find the post completely unconvincing.

The stated topic is the change in misogyny in the past 20 years, but there it largely focuses on the existence of sexism and misogyny in the present. With the exception of laws restricting abortion, the quantitative data do not indicate regress but rather stagnation, disappintingly slow progress or just progress. I quote with ellipses

"But ... little or no progress in some areas ... and outright backlash in others (most notably concerning abortion rights [and ? ...])...are ... it seems like ... still ... are ... Yes, ... but .. still

'Women remain ... women max out ...'"

All of this is presenting slow progress as regress.

One exception which I didn't flag is the survey of what men say they want in prospective wives. Appearance was far down on both lists (that is from memory). Checking I see that, in the recent survey it ranks 8th after "education intelligence" (4) (was 11th) and way behind "mutual attraction, love" (now 1st was 4th !!!). The men in the survey claim they care more about intelligence than looks (I suspect they are really saying they think they should care more about intelligence). The (claimed) interest in education & intelligence has skyrocketed. The other really dramatic change is that "chastity" went from 10th to 18th and last. I guess that shows markedly declining acceptance of women's sexual autonomy and the legitimacy of non reproductive sex.

You have picked the one datum you don't like out of the results and ignored the rest.

Also the older data are from 1939 -- the data just don't contain information on what has happened in the past 20 years, the ostensible subject of the post. Uh don't you remember that an earlier blogger here told us to "always click the link."

Then there is the anecdotal evidence. I note that female bloggers did not suffer abuse 20 years ago for an obvious reason. The web makes it possible for people to be jerks anonymously. It doesn't mean they weren't jerks.

You claim that misogyny via electronic media is common and suggest it is rarely punished. You present four examples. One you consider an exception. Of the other three one (Schultz) lead to a week long suspension and another (Milbank) cased the offending web feature to be cancelled. The case of Limbaugh isn't an exception (yes Schultz and Milbank have jobs -- so does Limbaugh). Your standard of adequate punishment is "career consequences" (for using an offensive word and using it with misogynistic intent once). You present no evidence at all that 20 years ago there would have been career consequences.

I note that Limbaugh was on the air 20 years ago. He might have become a super media star a bit fewer than 20 years ago, but the striking news is that he is in trouble as he hasn't been before.

In the whole section following the claim that there is more misogyny, you present no comparative evidence at all -- oh except for Archie Bunker. You define Norman Lear as the epitome of sexism 20 years ago (and Archie Bunker was created about 40 years ago -- I recall meathead saying "it's 1984" and Archie replying "no stupid it's 1974". The possibility that the founder of "People for the American Way" wasn't quite the cutting edge of sexism is not worthy of your consideration. Do you really assert that 20 years ago Tabloids did not " obsessively police the bodies of female celebrities" ? What tabloids did you glance at in the checkout line 20 years ago (I liked the Weekly World News, the National Enquirer wasn't absurd enough) ?

The whole post is based on conflation of "bad" and "getting worse." These are not similar concepts. Furthermore, you don't have to prove that something is getting worse to argue that it is unacceptable.

OOops update:

Ah I see I hit publish. Uh oops. Now I reread

"have we progressed much in the past 20 years? It’s my contention that we haven’t. Ah I see the claim is not that we have regressed as I assert at length.

Never mind.

Well some of the above comment might still be interesting. In particular the LA Times survey doesn't at all show what you suggest it shows. The cases of unpunished electronically transmitted misogyny are all cases of careers not being ended (oh you forgot Imus).

Also I might add that much evidence of the allegedly new misogyny is on the web. There is no evidence that men said such things less 20 years ago. The striking change is true freedom of speech due to the web. Now people can make public statements and can make them anonymously. Some use that freedom to express misogyny, but neither you nor I know what people say, rather than write, when we aren't around.

Cardinal Dolan's Slip Shows

Cardinal Dolan said

DOLAN: We got burned last year when we were told the redefinition of marriage didn’t have much of a chance — and of course it did. Our Senate leaders, we highly appreciated them being with us all along.

I comment

I think the acceptance of what Dolan considers blame is not a statement that they could have made a difference, but just the Catholic guilt thing. I find the phrase "Our Senate leaders" more striking. I can only interpret that as referring to the NY Senate Republican leadership (who else?) and so, it seems to me, that Dolan has referred to the Republican party as "our" party. Totally aside from the fact that most Catholics in his diocese are Democrats, the Catholic church isn't supposed to be partisan.

Noah Smith feels ill. I add to his suffering.

Stephen Landsburg makes Noah Smith lose his lunch. I note that it is much worse than Noah thinks at the risk of forcing him to lose his dinner too.

Oddly you didn't get around to mentioning two other gross errors.

First Fluke was talking about Georgetown U. insurance for students. Georgetown is a private non profit (obviously the issue was Catholic church controlled employers). So public money was not involved (not even a tax break, as the students are paying Georgetown U not vice versa).

Second Fluke in now way stated or suggested that she personally sues contraception. The testimony which Landsburg calls an attempt at extortion contained no statement inconsistent with the hypotheses that for example she is saving it for her wedding night or for another, that she is lesbian. She didn't mention the case of Sandra Fluke at all.

Landsburg's claim about what she said is demonstrably false and shows reckless disregard for the truth (the transcript of her testimony is on line).

OK it isn't really odd. The post you critique is so full of errors of fact and logic that it is hard to list all of them. Plus you have better things to do with your time.

Saturday, March 10, 2012

German Anti_Keynesianism

Simon Wren-Lewis is puzzled by Germans.

I comment.

In support of not just " the inflation of the Weimar Republic, or the Depression that followed" I note that the Great Depression followed after 6 years of stability (and the post WWI inflation lasted only 5 years with a definite pause in the middle). Only with very distant hindsight do they seem linked. Also, long after the hyperinflation and before Nazism Bruning seemed rather devoutly anti-Keynesian (not that he necessarily knew who Keynes was). There seems to be a problem with cause and effect. It seems more reasonable to say that German anti Keynesianism caused Nazism than the other way around.

The unemployment figures don't seem so mysterious to me. A natural candidate explanation is the German job sharing program which allows firms to put workers on part-time, pay them part of their former wage, and have the state pay the rest. Such workers are not counted even as partly unemployed. I's sure there is a heated debate about how important this program was. But it does deserve a mention.

I'd also note that, back in 2009, German policy makers argued that Germany didn't need discretionary stimulus, because their generous social welfare system was a more potent automatic stabilizer than anything in the USA. The figure also implicitly contrasts Germany's failure to stimulate with severe austerity in other OECD countries. The Keynesian guess (your guess for example) is that Germany should be doing rather better than Greece, Ireland, Portugal, Italy, Spain or (Cameron's) UK. You are not puzzled by German overall economic performance, nor should you be.

Ignoring talk and focusing on dollars and Euros, one might ask what anti Keynesian Germany ?

German Anti_Keynesianism

Simon Wren-Lewis is puzzled by Germans.

I comment.

In support of not just " the inflation of the Weimar Republic, or the Depression that followed" I note that the Great Depression followed after 6 years of stability (and the post WWI inflation lasted only 5 years with a definite pause in the middle). Only with very distant hindsight do they seem linked. Also, long after the hyperinflation and before Nazism Bruning seemed rather devoutly anti-Keynesian (not that he necessarily knew who Keynes was). There seems to be a problem with cause and effect. It seems more reasonable to say that German anti Keynesianism caused Nazism than the other way around.

The unemployment figures don't seem so mysterious to me. A natural candidate explanation is the German job sharing program which allows firms to put workers on part-time, pay them part of their former wage, and have the state pay the rest. Such workers are not counted even as partly unemployed. I's sure there is a heated debate about how important this program was. But it does deserve a mention.

I'd also note that, back in 2009, German policy makers argued that Germany didn't need discretionary stimulus, because their generous social welfare system was a more potent automatic stabilizer than anything in the USA. The figure also implicitly contrasts Germany's failure to stimulate with severe austerity in other OECD countries. The Keynesian guess (your guess for example) is that Germany should be doing rather better than Greece, Ireland, Portugal, Italy, Spain or (Cameron's) UK. You are not puzzled by German overall economic performance, nor should you be.

Ignoring talk and focusing on dollars and Euros, one might ask what anti Keynesian Germany ?

Poorly Written Poll

David Atkins
finds that Bloomberg won't let him criticize Obama from the left.

I comment.

You mean meany. You are messing with their narrative. I bet you claimed you approved of Obamacare too, when you really wanted single payer or at least a public option.

Or, in other words, on what planet did you spend 2010 and 2011. Almost all polls on the ACA are simple approve disapprove polls. Only the pinkos at the Kaiser Family Foundation (oh and CNN) ask why people disapprove and find that many think the bill doesn't go far enough, is not liberal enough and is too easy on health insurance companies.

I'm not paranoid, so I have to guess that the dozens and dozens of misleading polls are the result of incompetence and never finding out about the Kaiser and CNN polls. I mean what else could it be ?

Comment on Paging Hugo Sonnenschein

Brad quotes Kevin Quinn noting that DSGE models almost always include a representative consumer while Debreu (not mentioned) and Sonnenschein proved that, with many different rational consumers, all one can conclude is that excess demand satisfies Walras's law.

I comment.

Can you say Geanokoplos Polymarchakis ? Neither can I (and the spelling is pretty much a guess -- I'm tired of looking their names up). OK but you can say Cass.

DSGE models also assume that markets are complete which is roughly off by the same factor as assuming that there is one consumer. One might ask if the basic results of general equilibrium theory with complete markets hold, or generically hold, or probably hold, when markets are incomplete.

The answer is no. G & P show that, for an open and dense set of economies with incomplete markets, it is possible to make everyone better off by restricting free trade by rational agents. Cass and many others show that market outcomes can easily be (generically ? I don't know) indeterminate if markets are incomplete. Sunspots can matter the assumption hidden in "*the* outcome ground out by the system of markets" is a sick joke.

The assumptions at the base of DSGE models are not at all those generated by GE theory post 1960. They are the assumption that things which can happen in General Equilibrium models can't happen, because if you don't assume them away, then you must conclude that with strong assumptions (acceptable to GE theorists) you get no conclusions. The people who want to base macro on GE theory do not bow down to GE theorists. They assume that when GE theorists say "we don't know" those theorists are full of it.

Wednesday, March 7, 2012

Brad Kochtopus Cato

Burkean Bells it was hard to find this one




I thought that I read this blog regularly, but I missed the post where you wrote

"No one can disdain Cato more than I do, but they thought that they lived in the Republic of Plato and now find that they live in the sewer of Romulus."

I can't find it. The thought that maybe, somehow you refrained from writing that crossed my mind, but, really, it is sooo unpossible.

Chait Comment 4 RJW Hypocrisy Alert

Fabled Obama Race Video Surfaces! [Updated]
By Jonathan Chait


See post on Romney lying about advocating a national health insurance mandate below. The latest shocking exposes (pardon my accentless French and fork this iPad) are a USA Today op-ed and video broadcast on Frontline years ago. This is going to be a long campaign. I mean just a race pitting faithful husbands against each other is painful to the more prurient angels of my nature (come back Bill vs Newt all is forgiven) but if the scandals are hiding in plain view, I might have to pay attention to the policy debate.

So as anyone who read Dreams From My Father but happens to be functionally illiterate doesn't know, Obama's obsessive quest to find common ground causes him to admit that Black nationalists (like Republicans ) have some valid points as he works interminably around to concludint that, after all, he doesn't agree with them. Totally shocking eh am I Wright ?

And. There is evidence both that Romney lies like a rug and that the other campaigns are incompetent. Knock me over wi a wrecking ball, no a dinosour killing asteroid.

At least you couldn't guess what crazy things Newt, Michelle, Herman and Rick might say. Romney is boringly predictable.

I blush at my shamed hypocrisy, but I have an excuse. He is paid to do this and this is my hobby. I am paid by La Repubblica Italiana to serve it to its exacting standards.

Chait Comment 3 Duty To Shoot Fish in Barrel Calls

Obama vs. Romney on Iran
By Jonathan Chait


Romney said Obama’s “policy of engagement” with Iran has given the country’s leaders time to further develop its nuclear program and the impression that the United States won’t stop the government from continuing it.
“This president not only dawdled in imposing crippling sanctions, he has opposed them,” he said. “Hope is not a foreign policy. The only thing respected by thugs and tyrants is our resolve, backed by our power and our readiness to use it.”


You don't quite mention the fact that Romney's entire argument is based on a lie. Obama has managed to convince the world community to impose crippling sanctions on Iraq. This is like Romney's argument that Obama's auto bailout was all wrong and there should have been a managed bankruptcy just like Obama's bailout and his central argument that Obamacare is a mistake and we should have Romneycare which is the same except not paid for.

He just lied and claimed Obama's policy is to engage Iran (totally false) and not impose crippling sanctions (as Obama has).

Look, I understand that shooting fish in a barrel does not exercise your outstanding intellect (no snark there I wouldn't dare get in a snarkfight with you). But the fish in a barrel might be President of the USA next year and pointing out again and again that Romney is a shameless liar who has to lie because he has no reality based case to make is necessary.

Chait Comment 2

What Will Newt Do Next?


This time I am honestly disappointed. Before the jump I read "Put yourself in Newt Gingrich’s position. You want ..." and thought "this is going to be good. After the jump Chait will note that it is a very bad mistake for a sane normal person to try to predict by putting himself in Newt Gingrich's position, since Newt is to egomaniacal to his own position and will behave quite unlike a normal person in his position due to delusions of greatness, self indulgence and spite. But Chait will make it snappy. Just click for snark for the ages." But then you assume that Newt is just Jon Chait in New Gingrich's position. My new resolution is not to stand anywhere near you as you attempt to reason with a rabid rhino (note the h -- the endangered species which is an animal with a horn not the moderate Republican).

That is, what dsimon said much better and more briefly
(but I just aint got his culture never having seen The Dark Knight).
42 Minutes AgoReply

stolen comment

"Because some men aren't looking for anything logical, like money. They can't be bought, bullied, reasoned, or negotiated with. Some men just want to watch the world burn."--Alfred to Bruce Wayne, "The Dark Knight"

Chatcomment 1a 1b


New York Times Symposium Beats Straw Man Mercilessly


Greenwald’s penchant for telling bold truths that the corrupted partisans are too blind to see, in a manner that in no way is sanctimonious, is an inspiring example for us all. But he does tend to struggle with other aspects of his job, such as reading comprehension.


Correct headline "New York Times Symposium beats a dead straw man". For optimal humorous effect one must mix metaphors in a rabid Waring blender on speed. You try to be snarky,but you are an attack poodle which has sung it's swang song (in four part harmony with the spirit of H.L. Mencken, the fat lady and the octopus of fascism).


By the way, I'm sure readers here are cultured enough to know that "symposium" is classical Greek for Wankfest. Etymology like Karma. The meaning of a word can be distorted, even Bowdlerized, but in the end the moment of truth will come.

This is the ash heap of comments on other blogs

Don't blame me, blame Chrismealy who made me do it.